Education group Pearson sees brighter future with new 'Spotify' approach

LONDON (Reuters) - Educational publisher Pearson (PSON.L) expects its underlying profit to increase for the first time in six years in 2018 after rebuilding its business for students of the “Spotify generation” who want to rent rather than buy books.

Chief Executive John Fallon has cut thousands of jobs and sold assets including the Financial Times newspaper to convert the company from a business selling textbooks and tests to one offering ebooks, rentals and access to online courseware.

The uneasy switch to digital, which is similar to the changes endured by the music industry, has resulted in a string of profit warnings at the 174-year-old company, three restructurings and a halving of the share price since 2015.

But on Friday the group reported 2017 profit at the top end of guidance and said it believed it finally had a handle on the pressures on its North American higher education business which accounts for nearly 30 percent of the group.

“This is the Spotify generation, they are much happier paying to rent access to the materials they need whilst they need them,” Fallon told reporters.

“In the short term you take the revenue hit as you work your way through the transition, but once you’re through the transition you’ve actually got a much better quality business.”

Fallon said he expected the troubled North American business to have stabilized by the end of 2019. Until then it says it could decline by up to 5 percent this year and next.

The important unit last grew in 2011 before students started migrating to online and rental books and before some Americans opted to work as the economy expanded rather than go to college.

U.S. SCHOOL SALE?

The company said the other 70 percent of the business, which provides tests in Britain and America, English classes in China and courseware around the world, was now growing again.

The upbeat comments lifted the shares by 2 percent as the group reiterated its 2018 forecasts which mark a return to underlying profit growth for the first time since 2011.

The group also updated on its disposal strategy. In May last year it said it was reviewing options for its U.S. K12 business, which provides courseware for schools, and it said on Friday the business was officially up for sale and it was in talks with potential buyers.

If sold, it will join the FT, Economist, a stake in book publisher Penguin Random House and the Wall Street English business in being sold by Pearson.

The group said on Friday that those cost savings and a lower tax rate had enabled it to post 2017 adjusted operating profit of 576 million pounds, down 9 percent but at the top end of its recently upgraded guidance.

It reiterated its forecast for 2018 profit of between 520 and 560 million pounds, which it said represented underlying growth when stripping out disposals and currency moves.

In 2011, when it last posted growth, it reported profit of 942 million pounds.

“We see more positives than negatives in the results and guidance, though retain our long-term concerns on the structural tail risk in print, while we see scope for competitive pressure from the online majors,” said analysts at Numis, who have a “Sell” rating on the stock.